Sales discounts is a contra account and has a normal credit balance. Select one: True False
The correct answer and explanation is:
Answer: True
A sales discount is classified as a contra-revenue account and has a normal credit balance. It is used to record the reduction in revenue from offering discounts to customers, typically for early payment or to incentivize purchases.
Sales discounts are deducted from the gross sales to determine the net sales amount. The reason why sales discounts are a contra account is that they reduce the overall revenue, even though they are part of the sales process. When a company offers a discount, it is effectively reducing the amount of money it expects to receive from the customer. This reduction is recorded on the income statement under sales revenue, which reflects the net sales after accounting for the discounts.
The normal balance of a contra-revenue account is a credit, because it works opposite to a regular revenue account. Revenue accounts normally have a credit balance since they increase the overall value of the company, but a contra-revenue account works to decrease it. This helps in accurately presenting the financial performance of the company, as the gross sales figure can be higher than the actual amount collected after discounts.
For example, if a company has $100,000 in sales and offers a 5% discount to customers, the sales discount account would reflect $5,000 in discounts. The net sales figure would then be $95,000, which more accurately represents the actual amount of revenue the company expects to collect from the sales made. The $5,000 discount would be credited to the sales discount account, showing that the company earned less than the gross amount due to the discounts provided.